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Tax

Under the new tax laws, with the increased standard deduction where many taxpayers won’t obtain deductions for their mortgage interest and real estate taxes, they can potentially take advantage of a portion of those deductions against their business income.

If you haven’t considered this deduction due to being informed this was a red flag with the IRS or other factors, you should re-consider your position.

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

What Space Can Qualify?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

The home office deduction can help reduce your tax liability as long as you follow the regulations. In today’s marketplace many individuals are running businesses from home. This reason and the new tax laws make this potential deduction more viable in your tax strategy.

We have received a lot of questions asking if home equity interest is still deductible. This article should help you answer that question…

Most of us will agree that our biggest investment is in our home. So, it shouldn’t surprise you that your house or condo is your first port-of-call whenever there’s a need to borrow money. And the easiest way to draw funds against the security of real estate is by arranging a Home Equity Loan.

Home Equity funding helps us in important ways:

Number one, the interest rates payable on this type of loan are arguably the lowest available.

Secondly, you can get the cash working for you quickly with the least bother, paperwork and tedious protocol.

Then there’s the third big reason: help from Uncle Sam.

Up to now all interest payments on a Home Equity Loan were tax-deductible (barring the prior tax law thresholds). It made borrowing almost a no-brainer! Who wouldn’t opt for already-low interest rates to be pulled even lower? Benefits like this are rare in our modern world where it seems like everything, including financing fees, are only going up.

Well, it’s time for a retake on the “Uncle Sam thing”: the new taxation laws as per the Tax Cuts and Jobs Act of 2017, enacted in December of the same year, have removed some delectable treats from the traditional “Home Equity feast”.

Is it likely to change your borrowing behavior anytime soon? No, but it should give you pause. There’s a certain logic to it that really can’t be argued with. Here are the new Home Equity items to keep in mind:

The amount you can borrow is tied to the value of the residence, be it a primary or secondary home. The I.R.S. has decided that your total loan value cannot be more than the assessed value of the asset as a start.

And in combination with all other mortgages cannot exceed $750,000 (down from prior law). So Home Equity lending is not the bottomless well some may believe it to be.

Tax breaks haven’t disappeared but at the same time, they simply are not what they used to be. Any Home Equity draws you make from now on have to be used to build, renovate or essentially improve your residence to qualify the interest payable on them for a tax deduction.

So on this last point, for example: if you use your new funds to pay off student loans, reduce your credit card debt or splurge it on a vacation, nobody is going to stop you. What they are going to stop is anyone claiming tax relief for this type of expenditure for the foreseeable future.

TD Bank in a survey points out that 32% of Home Equity Lending fits the new definition for deductibility. Looking at it from the other side, 68% of the tax deductions we took for granted for so long now fall away. That said, we all know that there’s no substitute for smart thinking to make the most of new terms and conditions.

In addition, a high percentage of taxpayers who are used to itemizing their deductions (where you would deduct the interest), will potentially not itemize going forward due to the increased standard deduction.

Finally, the limitations do not relate to rental properties. Interest on loans are still fully deductible against rental income.

So don’t hesitate to consult with our professional tax team when it comes to making your Home Equity decisions, or to clarify your thinking on any tax matter. We often see benefits buried under the “strict letter of the law” – we could make a difference.

The Tax Cuts and Jobs Act (TCJA) raises many questions for taxpayers looking to plan for the coming year.

Below are answers to some of them to consider as we close out 2018.

Do I need to adjust my withholding allowances, given that tax brackets have changed?

You may notice a change in your net paycheck as a result of the tax law, which alters tax rates, brackets, and other items that affect how much tax is withheld from your pay. The IRS has already issued new withholding tables, and your employer should adjust its withholding without requiring any action on your part. But you may want to take the opportunity to make sure you are claiming the appropriate number of withholding allowances by filling out IRS Form W-4. This form is used to determine your withholding based on your filing status and other information. The IRS suggests that you consider completing a new Form W-4 each year and when your personal or financial situation changes.

Can I take advantage of the new deduction for pass-through business income?

The new rules for owners of pass-through entities — partnerships, limited liability companies, S corporations, and sole proprietorships — allow them to deduct 20% of their business pass-through income. The 20% deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is subject to certain limitations based on business assets and wages. Different deduction restrictions apply to individuals in specified service businesses (e.g., law, medicine, and accounting).

Can I still deduct mortgage interest and real estate taxes paid on a second home?

Yes, but the new rules limit these deductions. The deduction for total mortgage interest is limited to the amount paid on underlying debt of up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. Note that the new restriction will not apply to taxpayers with home acquisition debt incurred on or before December 15, 2017. Additionally, the deduction for interest on home equity loans (new and existing) is suspended and will not be available for tax years 2018-2025.

Note that the law also establishes a $10,000 limit on the combined total deduction for state and local income (or sales) taxes, real estate taxes, and personal property taxes. As a result, your ability to deduct real estate taxes may be limited.

Are there any changes to capital gains rates and rules that I should know about?

The rules concerning how capital gains are determined and taxed remain essentially unchanged. But since short-term gains (for assets held one year or less) are taxed as ordinary income, they will be taxed at the new ordinary income rates and brackets. Net long-term gains will still be taxed at rates of 0%, 15%, or 20%, depending on your taxable income. And the 3.8% net investment income tax that applies to certain high earners will still apply for both types of capital gains.

2018 Long-Term Capital Gains Breakpoints

Rate

Single Filers

Joint Filers

Head of Household

Married Filing Separately

0%

Below $38,600

Below $77,200

Below $51,700

Below $38,600

15%

$38,600-$425,799

$77,200-$478,999

$51,700-$452,399

$38,600-$239,499

20%

$425,800 and above

$479,000 and above

$452,400 and above

$239,500 and above

Can I still deduct my student loan interest?

Yes. Although some earlier versions of the tax bill disallowed the deduction, the final law left it intact. That means that student loan borrowers will still be able to deduct up to $2,500 of the interest they paid during the year on a qualified student loan. The deduction is gradually reduced and eventually eliminated when modified adjusted gross income reaches $80,000 for those whose filing status is single or head of household, and over $165,000 for those filing a joint return.

I have a large family and formerly got to take an exemption for each member. Is there anything in the new law that compensates for the loss of these exemptions?

The new law suspends exemptions for you, your spouse, and dependents. In 2017, each full exemption translated into a $4,050 deduction from taxable income which, for large families, added up. Compensating for this loss, the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, the child tax credit is doubled to $2,000 per child, and the income levels at which the credit phases out are significantly increased. Depending on your situation, these new provisions could potentially offset the suspension of personal exemptions.

I have been gifting friends and relatives $14,000 per year to reduce my taxable estate. Can I still do this?

Yes, you may still make an annual gift of up to $15,000 in 2018 (increased from $14,000 in 2017) to as many people as you want without triggering gift tax reporting or using any of your federal estate and gift tax exemption. But TCJA also doubles the exemption to an estimated $11.2 million ($22.4 million for married couples) in 2018. So anyone who anticipates having a taxable estate lower than these thresholds may be able to gift above the annual $15,000 per-recipient limit and ultimately not incur any federal estate or gift tax. Note, however, that the higher exemption amount and many of TCJA’s other changes to personal taxes are scheduled to expire after 2025, unless Congress acts to extend them.

There were a lot of changes that will create tax planning opportunities for the current year and future years. If you want to discuss your particular situation in depth to understand how you will be impacted and what you can do to minimize your tax liability, contact us today.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.

It’s no secret that many a sale has been closed over a three-martini lunch. Client entertainment is a given in most industries and most salespeople carry a company credit card for just such transactions.

It’s also no secret that more than a little commingling goes on between personal entertainment expenditures and those that qualify as business expenditures. That is no longer an issue; at least for now. Here’s why….

Under the new tax reform, the veil separating business expenses and pleasure has come crashing down with the elimination of entertainment deductions.

Not good news for business owners who counted on this deduction to defray tax bills at the end of the year. Even the limited deduction of 50% is no longer valid for dinners or cocktails with prospective clients or service providers and similar entertainment expenses.

What could be worse?

Well, how about this: sales related entertaining such as:

Sporting events—nixed,

Boating and Golfing—nixed.

Theater and other shows, box seats at stadiums—yes, those too.

What Does This Mean for Tax Planners?

Will they still be able to work their magic? Their expertise as tax planners is founded in creative workarounds and alternatives. The old saying, when one door closes, another opens applies in the tax world too.

What are The Options?

Well, there’s always Internal Revenue Code Section 274(e).

Despite reforming entertainment-related expenses, this will allow some expenses to be deducted, albeit under different circumstances.

For instance, if you pay for the use of club seating or a private box at a stadium, using this as compensation for your employees will still allow this expense to be deductible.

You need to meet two criteria to make this shift:

Ensure your employees attend these events.

Include the value of each event as taxable wages.

The “downside” for your team is additional tax that will be subject to withholding and is included on their form W-2.

The “upside” is it will ensure you can still deduct the expense.

Are Business Meetings Still Covered?

Brace yourself for the GOOD NEWS … YES!

As always, events and entertainment expenses related to business meetings including board of directors and employee meetings continue to be deductible. Deductible expenses continue to include meals and beverages, subject to the 50% limitation, facility rental, décor, supplies, and ancillary costs.

Is There Any Other Way to Deduct Entertainment Expenses?

Again, yes. You can still provide entertainment to the public, your clients, or prospective customers by issuing an information tax statement to the recipient. The most common form to use would be the form 1099-Misc. The recipient will need to include it as income and it will be taxable, but your business will still benefit from the deduction.

Let’s get more creative.

You might consider charging for the event or experience. Sure the income will be taxable, but the cost of the activity will become deductible, transforming your expense from after tax to pre-tax dollars.

The new tax reform brings big changes but your tax planner will still be able to work with you and provide valuable advice. To find out more about how to navigate the tax laws both new and old, be sure to work with someone who is certified in tax planning. We’ll help you find the new ways to open doors to a lower tax bill!